What documents will I need if I agree to hold the financing for a house I sell?

May 5, 2014 by Karen Hill | Filed Under: Finance

Please consult with a local attorney to answer this question. All states are different.

At the very least, traditional financing will require a promissory note and a mortgage or a deed of trust, depending on your state. You might want to include a security agreement and a UCC-1, to cover anything on the property that might possibly be classified as personal property instead of real property, such as a swing set or portable storage building.

Obtain a copy of the documents for your own home. Do not use the mortgage on your flip property because that is classified as a commercial loan. The bank uses different forms, and has different legal requirements, for commercial loans than for home loans.

The reason you want to look at some bank forms is because they are usually very strongly written in favor of the lender. Forms you obtain from a book, or off the Internet, or even from an attorney, might be less protective of your interests. Read everything, and compare the bank’s documents to the ones you propose to use. Are there any clauses you should add? Is there anything you do not understand? Make sure you understand what you are signing, and are comfortable with it.

You will also need something in writing from your lender waiving the due on sale clause. You must have this in writing. It is not a matter of trusting your loan officer or not. If he or she transfers, has a promotion, changes employers, or retires, someone else will be in charge of your loan. In many circumstances, the bank is not bound by anything that is not in writing and part of their books and records. In other words, if you and your original loan officer both swear under oath that you can sell the house without paying off the loan, the bank can still say, “We don’t care, it doesn’t bind us.” They can call your note, demand payment in full, and proceed to foreclosure if you do not pay up.

To be on the safe side, we would also obtain something in writing from an accountant or other tax professional that your documents meet IRS requirements so you do not have large taxable income in the year of the sale. A piece of paper, asking for a signature, tends to cause people to pay more attention and give more careful answers.

If you want to go the route of a contract for deed, go to the place were deeds are recorded in your jurisdiction. Often, people record contracts for deed in the real estate records. Obtain copies of several. Read them and make sure you understand the various clauses. Then hire an attorney to draft something for you, and compare the final product to the forms you copied. See if you need any changes in the finished product.

As a practical consideration, we usually do not like to give people copies of forms we find. We think it structures their thinking, and prevents them from being creative and coming up with independent solutions. After the fact, we use my forms as a checklist, to make sure we’ve covered all the bases.